Australian reinsurance rates are on the decline, with the flood of global reinsurance capital that has weakened international rates flowing on into this year’s renewals.

A relatively benign international and local catastrophe period last year has helped traditional reinsurer balance sheets, while capital from non-traditional sources has contributed to overcapacity.

The new capital, targeting the US property market, has displaced some traditional reinsurance capacity, which has sought opportunities for improved returns in Europe and Asia-Pacific markets including Australia.

Major reinsurers already represented in Australia are increasing their focus on the country amid these changing international dynamics, and as the impact of recent years’ storms and floods recedes.

“The softening we are seeing here in Australia is driven by the traditional reinsurance markets,” Willis Re Australia Head of Broking Glen Riddell told insuranceNEWS.com.au. “It is not new players coming into the market… [it is] established players wanting to write more.”

Australia and New Zealand property catastrophe rates fell 5-12% for the January 1 renewals and are showing further weakness, according to Willis Re.

“We are seeing this progress closer to 10-15% with renewals in the first quarter of this year,” Mr Riddell said.

Swiss Re says most of its Australian renewals are for July 1, but it there has been a weakening of rates and an increase in competition in the local market.

“We would say generally we are seeing some softening,” a spokesman said. “It is obviously very driven by the lack of major catastrophes in the past 12 months as opposed to 2010 and 2011.”

Standard & Poor’s (S&P) says rates for property catastrophe business, which dominates the January renewals, fell 10-15% in Europe, 15-25% in the US and up to 10% in Asia-Pacific.

“Capital levels in the global reinsurance sector continue to reach record high levels on the back of strong earnings in 2012 and last year and benign catastrophe loss activity last year,” the ratings agency says.

S&P has also flagged the potential for relaxed policy conditions as reinsurers react to increased competitive pressures.

“We believe recent talk of looser terms and conditions could spell the beginning of a shift away from the sense of reinsurer unity in underwriting discipline that we have perceived in recent years,” it says.

In a client briefing this month Willis Re noted some traditional reinsurers are deploying more capital into the casualty area, due to ferocious competition in the property catastrophe market. Casualty rates are down by as much as 10%.

Weaker reinsurance rates are contributing to slower premium growth for Australian insurers such as Suncorp, IAG and Wesfarmers.

Wesfarmers Insurance – which renews at July 1 – benefitted from lower rates last year and expects the weaker reinsurance market will continue to influence Australian premium levels.

“Reinsurance rates have come off and that reduces a bit of the pressure around premium rate increases,” Wesfarmers Insurance MD Anthony Gianotti told insuranceNEWS.com.au.

IAG MD Mike Wilkins says financial-year gross written premium will be influenced by a reduced need for rate rises, particularly in property classes, because there is less pressure to recover higher input costs – “notably reinsurance”.

The company has used weaker reinsurance rates to bolster coverage: last month it bought $5.6 billion of cover, compared with $5 billion last year.

The latest Marsh Pacific Insurance Market Report says last year ended with the most competitive insurance market seen in many years.

“There continues to be an influx of new capital into the reinsurance market and this surplus is fuelling intense competition,” it says.

Swiss Re says its global risk-adjusted January renewal prices fell 3.6% and business volume declined 6%, but the company forecasts a more positive outlook, from its perspective.

“The next major renewal dates are in April and July, when Swiss Re expects less margin erosion in natural catastrophe business than experienced in January and stable rates in casualty lines,” it says.